Ten Reasons Why Governments Fail

When politicians and bureaucrats fail to deliver what they promise — which happens a lot — we’re often told that the problem can be solved if only we get the right people to run the government instead. We’re told that the old crop of government agents were trying hard enough. Or that they didn’t have the right intentions. While it’s true that there are plenty of incompetent and ill-intentioned people in government, we can’t always blame the people involved. Often, the likelihood of failure is simply built in to the institution of government itself. In other words, politicians and bureaucrats don’t succeed because they can’t succeed. The very nature of government administration is weighted against success.

Here are ten reasons why:

I. Knowledge

Government policies suffer from the pretense of knowledge. In order to perform a successful market intervention, politicians need to know more than they can. Market knowledge is not centralized, systematic, organized and general, but dispersed, heterogeneous, specific, and individual. Different from a market economy where there are many operators and a constant process of trial and error, the correction of government errors is limited because the government is a monopoly. For the politician, to admit an error is often worse than sticking with a wrong decision – even against own insight.

II. Information Asymmetries

While there are also information asymmetries in the market, for example between the insurer and the insured, or between the seller of a used car and its buyer, the information asymmetry is more profound in the public sector than in the private economy. While there are, for example, several insurance companies and many car dealers, there is only one government. The politicians as the representatives of the state have no skin in the game and because they are not stakeholders, they will not spend much efforts to investigate and avoid information asymmetries. On the contrary, politicians are typically eager to provide funds not to those who need them most but to those who are most relevant in the political power game.

III. Crowding out of the Private Sector

Government intervention does not eliminate what seem market deficiencies but creates them by crowding out the private supply. If there were not a public dominance in the areas of schooling and social assistance, private supply and private charity would fill the gap as it was the case before government usurped these activities. Crowding-out of the private sector through government policies is constantly at work because politicians can get votes by offering additional public services although the public administration will not improve but deteriorate the matter.

IV. Time Lags

Government policies suffer from extended lags between diagnosis and effect. The governmental process is concerned with power and has its antenna captures those signals that are relevant for the power game. Only when an issue is sufficiently politicized will it find the attention of the government. After the lag, until an issue finds attention and gets diagnosed, another lag emerges until the authorities have found a consensus on how to tackle the political problem. From there it takes a further time span until the appropriate political means have found the necessary political support. After the measures get implemented, a further time elapses until they show their effects. The lapse of time between the articulation of a problem and the effect is so long that the nature of the problem and its context have changed – often fundamentally. It comes as no surprise that results of state interventions, including monetary policy , do not only deviate from the original goal but may produce the opposite of the intentions.

V. Rent Seeking and Rent Creation

Government intervention attracts rent-seekers. Rent seeking is the endeavor of gaining privileges through government policies. In a voter democracy, there is a constant pressure to add new rents to the existing rents in order to gain support and votes. This rent creation expands the number of rent-seekers and over time the distinction between corruption and a decent and legal conduct gets blurred. The more a government gives in to rent-seeking and rent creation, the more the country will fall victim to clientelism, corruption, and the misallocation of resources.

VI. Logrolling and Vote Trading

The public choice concept of ‘logrolling’ denotes the exchange of favors among the political factions in order to get one’s favored project through by supporting the projects of the other group. This conduct leads to the steady expansion of state activity. Through the ‘quid pro quo’ of the political process, the lawmakers support pieces of legislation of other factions in exchange for obtaining the political support for their own project. This behavior leads to the phenomenon of ‘legislative inflation’, the avalanche of useless, contradictory and detrimental law production.

VII. Common Good

The so-called ‘‘common good’ is not a well-defined concept. Similar terms, such as that of the ‘public good’, which is defined by non-excludability and non-rivalry, misses the point because it is not the good that is ‘common’ or ‘public’ but its provision when this is deemed more efficient by collective than individual efforts. However, this is the case with all goods and the market itself is a system of providing private goods through cooperative efforts. The market economy is a collective provider of goods as it combines competition with cooperation. Any of the so-called ‘public goods’, which the government supplies, the private sector can also deliver, and cheaper and better as well. In contrast to the state, the cooperation in a market economy includes competition and thus not only economic efficiency but also the incentive to innovate.

VIII. Regulatory Capture

The term ‘regulatory capture’ denotes a government failure where the regulatory agency does not pursue the original intent of promoting the ‘public interest’ but falls victim to the special interest of those groups, which the agency was set up to regulate. The capture of the regulatory body by private interests means that the agency turns into an instrument to advance the special interests of the group that was targeted for regulation. For that purpose, the special interest group will ask for extra regulation to obtain the state apparatus as an instrument to promote its special interests.

IX. Short-Sightedness

The political time horizon is the next election. In the endeavor that the benefits of political action come quickly to their specific clienteles, the politician will favor short-term projects over the long-term even if the former bring only temporary benefits and cost more in the long run than an alternative project where the costs come earlier and the benefits later. Because the provision of public goods by the state severs the link between the bearer of the cost and the immediate beneficiary, the time preference for the demand for the goods that come apparently free of charge by the state is necessarily higher than in the market system.

X. Rational Ignorance

It is rational for the individual voter in a mass democracy to remain ignorant about the political issues because the value of the individual’s vote is so small that it makes not much difference for the outcome. The rational voter will vote for those candidates who promise most benefits. Given the small weight of an individual vote in a mass democracy, the rational voter will not spend much time and effort to investigate whether these promises are realistic or in a collision with his other desires. Thus, the political campaigns do not have information and enlightenment as the objective but disinformation and confusion. What counts, in the end, is to get votes. Not the solidity of the program is important but the enthusiasm a candidate can create with his supporters and how much he can degrade, denounce, and humiliate his opponent. As a consequence, election campaigns incite hatred, polarization, and the lust for revenge.